Profitable rental investment
Buying real estate is not just about acquiring a home to live in. It can also be acquired with the aim of generating more income. This is the case of rental investment. Buying a property to rent it allows you to benefit from an appreciable profitability. Profitability is the main criterion for measuring the performance of a rental investment. It is possible to determine this element by taking into account the applied rent and the purchase price of the property. However, in order to benefit from a good return on a rental property investment, there are many criteria to be taken into account, including the choice of the location of the property, the type of rental, the choice of taxation or the model of property to be acquired .
How much does an investment in rental property yield?
In general, the profitability of a rental investment varies from 2 to 8%. In some cases, it can go beyond this rate and reach 10%. Thus, compared to other types of investment, real estate ensures high profitability and positive cash flow. However, it should be noted that, apart from the choice of location, the performance of the investment will depend on the characteristics of the property to be rented.
- Studios and T1 apartments
Compared to larger homes, these smaller apartments and studios pay more per square metre. The price per square metre of a small area is much higher. The same applies to the rent. It is important to know that these studios and T1s are highly sought after in the main student cities in France such as Toulouse, Lyon, Paris or Bordeaux. In these cities, the target tenants are particularly students and young working people. The rental demand for small apartments is very high. For this reason, these apartments offer a good return. On the other hand, the only disadvantage of investing in these dwellings is that the occupants can often change.
- T4 apartments and houses
Sold or rented per square metre, these large surface area properties are less profitable. However, the advantage of investing in large surface areas is that the tenants are more stable, as they are often families. These occupants often tend to take ownership of the house. As a result, the house will be well maintained, which allows the owner to reduce the costs of maintenance and renovation. In other words, it is these maintenance costs that often weigh on performance. In this case, safety will compensate for this lower yield in large houses and apartments.
- Two or three rooms
These dwellings combine the qualities of large and small surface areas. The stability of the tenants is assured and the risk of turnover is reasonable. By investing in a house with two or three rooms, the rental vacancy and maintenance costs can be limited. At the moment, shared accommodation is also becoming a trend. This type of flat-sharing is also very popular in student cities where the majority of the occupants are students. For the latter, sharing a two- or three-room apartment allows them to save money on their budget. Investing in a student neighbourhood guarantees a good return.
Investing in two or three rooms offers a correct return as well as correct risks. In fact, like all financial investments, profits pay for the risk. Therefore, in a rental investment, the higher the rent, the higher the risk.
Other factors can also influence the performance of a property, namely :
- Tax benefits
The various fiscal arrangements, such as a land deficit for an old property, make it possible to increase the contribution of investment. By benefiting from a tax reduction or an allowance on the income received, the owner-lessor can take advantage of a significant rental contribution and generate positive cash flow. However, it all depends on the status chosen by the lessor. To make a good deal in rental real estate, tax exemption is an opportunity not to be missed. This applies to both new and old properties.
- The price of the property
The purchase price is an essential parameter that must be taken into account. Indeed, to make a good investment, one must make sure to buy at the best price. That is to say that too high an amount at the time of purchase will reduce the rate of return on a real estate investment. Moreover, with a price that is currently on the rise, this will have an impact in terms of resale.
- Applied rents
Some investors will tend to raise the rent in order to take advantage of a better return. Of course, in order to retain tenants, it is rather judicious to apply a rent adapted to the offer and the proposed pressures. By offering a tastefully furnished and decorated property, with equipment such as a washing machine, television etc... You will be able to propose a price slightly higher than the market average. Thus, the price of the rent applied is a point not to be neglected to ensure the success of your project.
How to calculate the profitability of a rental investment?
As a safe haven for a long time, the acquisition of a property reassures investors by its ability to generate a very attractive rate of return. This, in a relatively secure environment, also allows them to benefit from significant tax advantages. Like all financial investments, real estate must earn a return for the lessor.
The rate of return is a criterion for measuring the performance of the rental investment. Thus, rents, all charges, tax reductions and loan repayment should be taken into account. It should be noted that real estate is the only investment that can be financed on credit. In this case, professionals and private individuals can take advantage of the credit leverage effect to acquire a property. This estimate of annual cash flow will be the only way to evaluate the economic benefits of a rental investment. See this video to find out how to determine the profitability of your property.
Calculating the return on rental investment is a particularly complex operation.
- Gross profitability
To calculate the gross profitability, the rents received for the year are divided by the purchase price of the property. The work and the notary's fees will be included in this purchase price. This parameter allows the lessor to make a first comparison between the different properties he wishes to acquire.
- Net Profitability
For this calculation, it will be the same as for gross profitability. However, in this case, it will be necessary to deduct from the rents received the amount of the annual charges generated. These charges are taxes, social security contributions, co-ownership charges that are not recoverable from the occupants, the costs of the lessor's insurance, management fees if the property is managed by a professional, not forgetting loan interest if the property was financed from a loan.
By calculating the net return, you can get an idea of how much your investment in rental real estate will actually pay off. In this way, you know how much you, as the owner, will have to pay in a year when you rent out the property.
Based on the calculation of this net return, it will be possible to determine whether it is necessary to make an effort to save in order to assume the investment or whether self-financing with the sums collected will be sufficient. However, before investing, it is important to make sure that this is an area where rental demand is really tense. It is also necessary to make sure that the rate charged corresponds to the market rate in the city or neighbourhood chosen.
Renting naked or furnished: which is more profitable?
In order to guarantee a better investment, it is important to define in advance the rental method for the property. The landlord can rent the property furnished or naked.
- Rent the naked property
In an empty rental, it is not necessary to spend a lot of time preparing the house as the owner will not have to provide the mandatory furniture as in the case of a furnished rental. Moreover, as the property will not be equipped or furnished, this avoids the owner having to bear the costs of possible damage to these different elements.
- Furnished rental
The furnished apartments already have the necessary equipment and furnishings for the comfort of the tenant. By renting a furnished property, the tenant will be able to move in immediately without having to provide furniture. Namely that the decree of law Alurfixes the list of equipment necessary to obtain the status of furnished landlord. Therefore, for a house composed of several rooms, each room must be equipped with sufficient furniture.
The main advantage of investing in a furnished rental is that it allows you to benefit from a high return while taking advantage of softened taxation. Compared to bare renting, the rents of a furnished property are higher.
Renting a furnished apartment allows you to benefit from a particularly advantageous tax system. Namely, the sums received from a furnished property are considered as Industrial and Commercial Benefits or Bic. With annual rental income of less than 70,000 euros, the owner will be subject to the micro-Bic regime. This scheme allows the owner to benefit from a flat-rate allowance of 50% on the profits received from the furnished rental.
However, as soon as the annual rental income exceeds this amount, the actual scheme will be compulsory. It should be pointed out that the actual system offers a very advantageous tax framework. This system allows certain expenses to be deducted from the revenue collected. The actual system also offers the possibility of depreciating movable and immovable property. This is a significant advantage for the owner-lessor in terms of taxation.
By opting for a furnished property, it allows you to benefit from the status of a professional furnished landlord (LMP) or a non-professional furnished landlord (LMNP). LMNP status applies for annual rental income not exceeding 23,000 euros. It allows you to benefit from a deduction of charges on rents received from furnished rentals, as well as depreciation for about ten years.
With annual rental income in excess of 23,000 euros, the lessor automatically benefits from LMP status. The advantage of this status is that, taxed under the actual scheme, the profits received are taxed on the property income. Consequently, the landlord can take advantage of the land deficit to reduce his taxes. Thus, regardless of the regime or status chosen, renting furnished accommodation provides a very advantageous tax system. Hence, opting for this type of rental will only bring benefits for the profitability of your rental property investment.
One of the advantages of renting a furnished property is also the flexibility of its lease. If renting a building or a naked house requires the signature of a lease for a minimum of 3 years, the lease is for a minimum of one year for a furnished property. And if the occupants are mainly students, the lease can be for 9 months without tacit renewal. Because of this contract, it is possible that the occupants of the property change often. This is why, in order to avoid rental vacations, it is more interesting to invest in an area where rental demand is high, such as in a student city.
In what type of property to invest in rental property?
In order to guarantee the success of a real estate project, it is essential to define its target occupants beforehand. The choice of the property to be acquired will depend on these occupants.
- Investing in an investment property
In order to benefit from a good rental return, most investors are looking to buy rental properties. Indeed, betting on a building is a profitable real estate investment and the profits received can be added to the owner's income. In large cities where rental demand is high, the acquisition of a building offers a high gross yield.
The main advantage of investing in this type of property is that buying in bulk is cheaper than buying several separate lots. Thus, by investing with a larger amount, it will be possible to benefit from a very reduced price per square metre.
- Investing in a property to be rehabilitated
To make a good deal in real estate, buying a property with works is an excellent solution as these properties are cheaper to buy. Thus, acquiring a property to be rehabilitated with a view to renting it out will bring a good gross rental yield. Also, it should not be forgotten that for this type of property, the work will be heavy. Therefore, it is important to take into account the profitability of the investment in relation to the purchase price and the costs incurred for the works.
Carrying out the rehabilitation work also requires a real commitment from the new buyer, as site supervision takes time. This is why most of the investors in these works are people who already own one or more properties.
- Acquiring an already occupied dwelling
For an acquisition project with a view to renting it out or diversifying its assets, prospecting for already occupied housing can be particularly profitable. By opting for an occupied property, it is no longer necessary to look for tenants. It also makes it possible to collect rent from the first month of the property's acquisition. In this way, it will also be possible to know immediately what the investment will bring. The other advantage of acquiring a property that is already occupied is that it will also be easier to find out more about the occupants. This applies to both the payment of the rent and the maintenance of the house. The investor has the possibility to ask the seller for all this information.
Before acquiring these properties that already have occupants, it is essential to check the lease and the status of the tenant to find out if they are suitable for the buyer. It is necessary to make sure that the contents of the contract are carefully studied to make sure that you get a good deal and that the project is completely profitable.
Of course, in this context, the only difficulty will be to quickly find an occupied house or building. Although some companies and advertisements for sale are specialized in advising and selling these properties, the advertisements are very limited. Moreover, most of the offers are often located in the Paris region.
- Investing in commercial space and offices
Investing in professional real estate is a solution that many investors don't always think about. Of course, investing in a property for professional use is particularly interesting. In this context, it is a question of investing in a property that can be used as offices or commercial premises. Namely, renting commercial premises has a gross rental return of 5% and in the best locations in large cities, it can be as high as 10%.
Thus, to find the best location for an investment in commercial premises, it will be necessary to prospect the busiest streets and the most exposed buildings if it is a shop. This is the opposite of the ideal location for a residential property, where calm is preferable.
It should be pointed out that instead of renting a property for residential use, investing in premises for professional use allows you to benefit from a high return. Investing in commercial premises offers a very attractive return. The gross annual rate for a business property can reach up to 10%.
The main advantage of investing in commercial space as well as offices is that it is a market that is not about to run out of steam. Businesses will always need office space, just as merchants will always need office space. As a result, investment in commercial real estate has very low rental vacancy rates. However, care must be taken to find the best location for an investment in business property.
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